When a private company decides to attract investors into the company, it goes by way of an IPO. With this process, the company is simply transforming from a private company into a public company. It means that the company becomes a publicly-traded company. Not just that, it also becomes a publicly-owned company.
Now, the question is, why do companies go public?
Companies go public all the time. However, the question is, why do com0panies go public? One of the foremost reasons for this is the need to generate a lot of money for the company. When a company goes public, it has access to the pool of funds coming in from investors into the company. Also, the company becomes one of the companies listed on the stock market.
What To Consider Before Going Public?
Before a company decides to go public, there are certain factors that it must consider. It has to look at the possible advantages and disadvantages of such a move. The going public must be a decision that the company arrives at after carefully analyzing what it takes.
Careful consideration of these factors becomes necessary, especially since the process of going public is a complex one. Moreover, it tends to change all aspects of the company.
One of the factors that the company has to consider carefully is whether the company is ready and able to go public. If the company is not yet prepared to go public, it will not be able to sustain the process of going public and offering its shares to members of the public.
Thus, the company must take a look at its size and the value of assets that it has. It must have a solid asset base and well structured to attract investors. The internal processes of the company should be able to withstand the demands that come with going public.
Another thing the company has to consider is its management team and how well they know about making public offerings. Their competence as the company makes its first IPO is essential to the success of the process. Also, the company should be able to bring in experts where necessary to ensure that the process goes on successfully.
Another factor that the company should carefully examine is what it seeks to achieve by going public. Does the goal align with the long-term goals of the company? Thus, the company should be able to come up with a plan that clearly expresses these intentions and communicates them to interested investors.
The share capital and structure of the company is another essential aspect the company has to consider. Issues relating to share issuance should be at the core of their focus, as they seek to ensure that they satisfy the imposed criteria.
Some Reasons Companies Go Public
When a private company decides to go public, it is usually a big decision to take. However, we need to understand the reasons behind this move for these companies that take the big leap.
Companies go public because it accords the status of prestige on that company. It becomes a thing of honor that the company is listed on the stock market and makes its shares available to members of the public to invest in the company.
Also, the public sale of shares is another reason for going public. A private company cannot offer its shares to members of the public; only a public company can. It is this factor that influences why many companies go public to make their shares available to the public and bring in investors.
Advantages Of A Company Going Public
A company obtains several benefits it decides to go public. One of the most significant gains, when a company goes public, is that it stands to generate capital that it can use to fund its operations. It becomes an avenue for investors to buy shares of the company.
As a result of the inflow of funds, the company can expand its operations and build a stronger base for its activities. Using this medium, the company may embark on a new project, invest in new areas, and accumulate assets.
Some companies take loans when they need a fresh inflow of funds to finance their operations. However, the downside to it is that they have to repay the loan at some point. When a company goes public, it achieves the same purpose of generating funds. However, in this case, the company does not have to pay back the money. Thus, it helps the company to solidify its financial base.
Another benefit that a company gains when it goes public is an increase in public awareness. The publicity that the company enjoys from the process opens the company to a fresh batch of customers. In addition to customers, the company also opens up to investors that are willing to invest in the company.
One interesting fact to note is that once a company is public, it can use its stocks to fund business operations. It can also use it as a compensation plan for outstanding and loyal employees.
Disadvantages Of A Company Going Public
Like there are advantages for a company going public, there are also disadvantages when that happens. One of the problems with going public is that the company will have to spend so much money. It will spend to comply with all the requirements that are necessary to go public.
The cost of undergoing the process of going public is expensive. The company will have to consider whether it can bear the cost without it affecting the financial base of the company. Thus, it is usually not suitable for small companies that cannot afford to pay for the requirements.
Another disadvantage is that when a company goes public, it loses a greater portion of its independence. In such cases, there are now more persons involved. That is the people that will decide on the steps and decisions which the company has to take. The company has no autonomy over its affairs as it would ordinarily have if it were to be a private company. The shareholders are the ones that bypass the decisions that the management makes.
The process of going public takes so much time. The time that the process takes can affect other aspects of the company. It is because the management team will be preoccupied with getting the company public, and at that time, there is a tendency to neglect other aspects of the company’s operations. Usually, the process of taking the company public takes between 6-9 months before you can conclude all the processes.
When a company goes public, certain information about the company can no longer be private information. Instead, it must disclose the information to the public as one of the requirements for being a public company. Also, these companies have to undergo auditing by public companies.
Steps To Take A Company Public
For a company that wants to go public, it must commence the process by reaching out to an investment bank. With the investment bank, the company decides the number and amount of shares that it seeks to offer to the public.
At this point, the investment banker takes on the shares and becomes the owners of the shares. The processing of gaining legal power over these shares is what we refer to as underwriting. What the underwriter does is to offer the stock to the public. It makes it available at a higher rate than what it got for the shares.
The next thing is to approach the SEC and file the necessary documents with them. The essence of the filing with SEC is to seek approval for the proposed company that is going public. The other steps depend on obtaining approval from the SEC.
Therefore, when the company obtains the approval of the SEC, he can now go ahead to accept the subscription request and proceed to negotiate the IPO and conclude the sale of the shares.
In theory, the process might sound quite easy. Meanwhile, in practice, it is a complex process that involves several steps that take time and money to follow through. There are also instances where the process requires more than one investment bank.
Parties Involved When A Company Goes Public
The various parties involved in the whole arrangement to take a company are the issuer, the underwriter, and syndicates, where it involves more than one investment bank in the process.
The issuer is the company that is going public and issuing its shares to the members of the public. The underwriter, on the other hand, is the investment bank that assumes responsibility for the shares that the issuing company is offering.
It is in circumstances where there is more than one investment bank involved in the process that you had a lead underwriter and the others as syndicates. The issuing company usually gets more than one investment bank involved where the IPO is a large one that one investment bank cannot possibly handle alone.
No doubt, taking a public is a big decision that any company can take. It explains why a company has to take into consideration all aspects to it, before making a move to go public. The question, why do companies go public, is so crucial that the company has to decide for itself if it must go public or remain as a privately owned company.
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